China – did you see it coming?

Who would have thought in your lifetime ….

You would be watching the financial news to see what is happening in China’s economic landscape. The China Credit Bubble, and how it could affect you. Unbelievable.

Some of us can remember the Long March by Mao Tse-Tung over 60 years ago, and couldn’t understand how the Chinese economy worked. Probably most of us didn’t even care that much. China was far away and even further away in terms of wealth, industrial production and financial stability.

Then as idealism waned and realism rose, the sleeping giant woke up. A miracle perhaps, a conundrum for sure. Clearly the population of China, most of it in an agri-economic structure, began to see what the rest of the world had – and they wanted some of it also. The factories of China which had produced grey uniforms and slip-on shoes, began to produce heavy equipment and then domestic goods. In fact they produced that much they began to export it. Herein, is why the glue starts to melt away.

The astonishing rise of “China Incorporated” has been based on a credit-hungry model. All of a sudden borrowers became lenders who in turn, became borrowers themselves. The cycle was established. The spread of credit, inwards and outwards, moved across the world – not just the “free world”, but the entire world.

As credit hunger increased dramatically, and credit feeding complied, the credit bubble grew and grew. The knock-on effect of liquidity, especially as it started to dry up, is now beginning to impact the rest of the world economy. This is not the place to discuss the workings of the wholesale credit markets in detail, but suffice to say, that as borrowers can’t find the revenues to pay back their loans on time, and have to rely on more and more borrowing to keep up, the entire structure begins to feel the strain.

Have we seen this before….?…… in recent times, we sure have.

Is it therefore possible that we might see another real estate crunch, investment degradation in our pension portfolios and a banking crisis in the western economies, this time emanating from the other side of the world…? In short the answer is maybe.

The inability to pay interest on debt, or repay the debt itself, can easily cause the reverberation effect worldwide. The answer is not for China to borrow their way out of trouble, but to support its banking sector and encourage a steadier increase in growth, both internally, and in their export business.

Can they do it…?……….Yes.

Will they do it …?……….Let’s hope so.

It may require another Long March – this time to budgetary controls. With any luck they will control their budgets before they impact mine.

© Bill Storie, Bermuda. 2013.

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